India is playing catch up with China

08-06-2016 | Insight

The IMF’s April 2016 World Economic Outlook publication outlined how India will be the world’s fastest growing major economy through 2016-17 at 7.5% – something that has not gone unnoticed by fund buyers and investment professionals across the globe.

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Fund Buyer Focus

In cooperation with CityWire every quarter we ask several fund selectors across Europe their opinion on investment topics.

India has long lived in China’s economic growth shadow. Slow to change and massively bureaucratic, it has lagged in the wake of the Chinese economic powerhouse over the past 20 years. Change, however, is now in the air. Data released by the International Monetary Fund (IMF) suggests that India’s economic growth now outstrips that of its great north-easterly neighbor which faces massive challenges of spiraling debt and an unbalanced economy.

“India is my China and I am particularly bullish towards it,” says Frank Huttel, head of portfolio management at German boutique FiNet Asset Management AG. “I have been investing in the country since last year and the reforms implemented following the election of Prime Minister Narenda Modi were a real inflection point for me. Since he’s come into power, he has changed quite a lot.”

Shareholder value

In a rapidly changing economic backdrop for Indian companies, the current market environment appears a ripe one for fund buyers. As Joanne Baynham, head of investment strategy and fund manager at MitonOptimal Group explains, with positive consumer data, inflation under control and a normal monsoon expected, the macro picture in India appears positive for investors.

‘Clearly there are opportunities in China, but we are less comfortable buying China-centric funds than Indian ones’

In her opinion, it’s also the legal framework of Indian companies that helps give it the edge over its Chinese counterparts. “Clearly there are opportunities in China, but we are less comfortable buying China-centric funds than Indian ones, primarily because of the rule of law. We believe as shareholders, we will be looked after in India and this isn’t always the same in China,” she explains. “Today, you can buy stocks in India that are very well-run from a legal perspective.”

This isn’t to say that Indian equity investors do not have to be cautious towards potentially ineffective state-run stocks. But although Baynham remains wary of such companies, she feels that the Modi administration’s efforts at helping make the country an easier place to do business in, has helped many private firms flourish.

Finding cheap stocks in India

“For us, knowing where to be invested in India is incredibly important and we would single out corporate governance as one of the most important traits. We like companies that don’t solely care about being cheap or expensive, but those that treat shareholders fairly,” she says. “For example, in the Indian banking sector, there are still stocks on the market that are cheap as result of being told who they can and cannot lend out to by the government. Conversely, there are also many private run banks that have a better understanding of bottom line and focused on creating profit, not just growth.”

‘I think the most important point is to utilize a very active approach’

“No matter how cheap a stock might look, it’s important to look beyond that. Indian equity funds need to understand the mechanics behind a stock’s price.” Gaining an in-depth understanding of what is an improving, but at times still complex Indian corporate culture, is vital in order to extract real value. For Kolcava, knowledge is power when running the rule over potential Indian equity managers.

“I think the most important point is to utilize a very active approach. We are looking for the best knowledge of the local situation on all levels, including economic politics and the respective business models of companies across sectors. We would seek a manager who can really exploit all opportunities,” he says.

Local presence

“We also believe that a local presence is key to investment success. I would prefer to have a manager who is regional – not necessarily domiciled in India – and operating from somewhere such as Singapore or Hong Kong. Additionally, we would give the manager the freedom to allocate to whichever company he or she would consider attractive.”

Baynham echoes these sentiments surrounding choice of asset-allocation, particularly in terms of cap-scale where she feels India’s diversity demands a broad investment scope – but one that solely focuses on the country. “I think in the Indian universe you have enough choice. There is no need to focus on large or small in India and like the wider sphere of emerging markets, there is so much opportunity across all cap-scales,” she says.

“India has a massive opportunity at the moment because commodity prices are lower; of course this also means net exporters of oil such as Brazil or Russia are not doing so well. Buying a general emerging markets fund may not take total advantage of the great tailwinds India’s domestic economy is currently enjoying, which is why we try to buy country-specific funds.”

Great potential in India

Huttel sees greater potential specifically within small-cap companies, but marks out India’s fledgling e-commerce sector as one that epitomizes the vast opportunity on offer to investors in the country. Morgan Stanley Research recently increased its estimate of the country’s e-commerce market to $119 billion to 2020 from its previous figure of $102 billion and in Huttel’s view, the sector could go from strength-to-strength.

“India is home to a very young population, one that avidly uses the internet and mobile devices, opening up an area where Indian companies could grow quite fast,” he says. “I feel there is huge potential for e-commerce in the future and it is a topic that I find really interesting.”

In order for the e-commerce sector to really kick-on, however, Modi’s pledge to reinvigorate the country’s creaking infrastructure must become a reality. “If you want to use the internet, you need infrastructure. In India, this currently is far from perfect. If e-commerce is to grow and for it to move forward, investment in mobile internet and related infrastructure is crucial,” Huttel continues.

Although Modi and India clearly face a number of challenges on the road to reform, investors feel optimistic about the work already done to try and reform the country. The contrasting nature of the two countries’ political systems makes direct comparisons difficult to make, but Kolcava maintains a preference for Indian equities over Chinese holdings – suggesting their importance in global portfolios will only rise in the coming years.

“Going forward, China has shown that India will catch up in the next 10-20 years in terms of its footprint in the global economic landscape. As always, there will be cycles, but in the long-term I think India will become a success story.”

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